A Cross-Country Study on the Relationship between Financial Development and Earnings Management
Journal of International Financial Management and Accounting 29 (2):166‒194, 2018
41 Pages Posted: 20 Nov 2013 Last revised: 7 Jun 2018
Date Written: October 1, 2017
This paper investigates whether a country’s level of financial development is associated with earnings management in an international setting. Financial development is likely to heighten the monitoring and scrutiny of accounting numbers because of strengthened investor protection laws and regulations as well as sophisticated market participants. Therefore, we first hypothesize that both accrual-based and real earnings management decrease with greater financial development. However, research shows that managers tend to apply real earnings management, instead of accrual-based earnings management, under strict accounting standards, regulations, and close auditor scrutiny. Thus, we explore the alternative hypothesis that accrual-based earnings management decreases but real earnings management increases along with higher financial development. We examine the relationship between financial development and both types of earnings management using 56,830 observations in 37 countries covering the period 2009 to 2012. The results indicate that both types of earnings management are more restrained under higher levels of financial development.
Keywords: Financial Development, Accounting Institution, Accrual-Based Earnings Management, Real Earnings Management
JEL Classification: M41
Suggested Citation: Suggested Citation